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Why Inequality Matters, and What We Should Do About It

I spoke tonight at the Sydney Institute on the topic of inequality. The embedded video is a short version, and the long-play version of my speech is below.

(See also reports in the SMH and Canberra Times, and an op-ed version in the National Times.)

Why Inequality Matters, and What We Should Do About It*

Andrew Leigh MP
Federal Member for Fraser
www.andrewleigh.com

Sydney Institute
May Day 2012

Introduction

Imagine a ladder, in which each rung represents a million dollars of wealth.[1] Imagine the Australian population spread out along this ladder, with their distance from the ground reflecting their household wealth.

On this ladder, half of all households are closer to the ground than they are to the first rung.

The typical Australian household is halfway to the first rung.

Someone in the top 10 percent is at least 1½ rungs up.

A household in the top 1 percent is at least 5 rungs up.

Gina Rinehart is 5½ kilometres off the ground.

‘The rich are different from you and me’, wrote an awestruck F. Scott Fitzgerald.[2]

‘Yes’, wrote the laconic Hemingway. ‘they have more money.’

But why should we care about the gap between rich and poor? Shouldn’t we focus on raising the bottom, rather than how much wealthier the top are than the rest? Aren’t discussions of inequality merely – shudder – ‘the politics of envy’?

Certainly, there are eminent economists who have taken this position. The University of Chicago’s Robert Lucas has argued that ‘of all the tendencies that are harmful to sound economics, the most seductive, and in my opinion, the most poisonous, is to focus on questions of distribution’. Harvard’s Martin Feldstein says ‘there is nothing wrong with an increase in well-being of the wealthy or with an increase in inequality that results [solely] from a rise in high incomes’.[3]

Contrary to Lucas and Feldstein, I want to persuade you that inequality matters, that the gap between rich and poor really is an important public policy issue, even apart from the question of poverty. Inequality has costs and benefits, and policymakers need to think hard about the right level of inequality. This is an issue that Wayne Swan has put squarely on the national agenda, and I commend his article in The Monthly to you.[4]

To begin, let me take a moment to review what we know about inequality in Australia. There are many measures of inequality, but I’m going to focus on top income inequality, because it allows me to look at a much longer period, and because it’s very clear that when we’re talking about top incomes, the topic is inequality rather than poverty.[5]

In Which Some Boats are Lifted More than Others

About a decade ago, I teamed up with a British economist, Sir Tony Atkinson, on a project to use taxation statistics to learn more about inequality. The idea was to follow work by Simon Kuznets in the 1950s and Thomas Piketty in the 1990s, using breakdowns of taxation figures to look at the top of the distribution. By combining taxation statistics for the top end with national accounts and population statistics for the entire population, we’re able to answer questions like ‘what was the income share of the richest 1 percent of Australian adults?’.

While regular surveys are only conducted every few years, taxation data are available annually. So we were able to estimate a measure of ‘top income inequality’ going back to the 1910s for Victoria, and the 1920s for Australia.

The thing that strikes you first is that for all the legends of egalitarian bushmen, early-twentieth century Australia was a strikingly unequal place. I’ll come to the data in a minute, but let me remind you first of the character of the place. The Australian Club in Sydney and the Melbourne Club were elite institutions. True, an Australian gentleman need not have been a man of leisure – both clubs included merchants and squatters from the outset – but great deference was paid to the elite.[6]

Large fortunes were made in the early-twentieth century, and many of the super-rich lived extravagantly.[7] Retail merchant Samuel Hordern raced yachts and bred racehorses. Goldmining magnate Walter Hall was also a racehorse owner, and collected Old Master paintings. Other super-rich of the era include newspaper proprietor David Syme, pastoralist Samuel McCaughey, union-busting manufacturer Hugh McKay, and retailer Sidney Myer.

Then things began to change.

In the 1910s and 1920s, the richest 1 percent of Australians had 12 percent of national income – 12 times their proportionate share. By the mid-1950s, this was down to 8 percent. By 1980, it was down to 5 percent.

You can see the same pattern if you look further up the distribution, at the richest 0.1 percent – the 1/1000th of Australians with the highest incomes. Back in the 1910s and 1920s, the top 0.1 percent had about 4 percent of household income – 40 times their proportionate share. By the 1950s, this had fallen to 2 percent, and by 1980, it was down to 1 percent. Under the Prime Ministership of Malcolm Fraser, the share of income held by the richest 1/1000th of Australians was only a quarter of what it had been under Billy Hughes.

The collapse of the super-rich is vividly portrayed in William Rubinstein’s book The All-Time Australian 200 Rich List. Published in 2004, the list covers the all-time richest 200 Australians, from Samuel Terry to Kerry Packer. The cut-off for inclusion in the book is that you had to have wealth of 0.17 percent of GDP, equivalent to $2.7 billion today.

Because Rubinstein’s book covers 200 people and about two centuries, you’d expect an entrant every year or so. But the striking thing is that for four decades, from 1940 to 1980, there wasn’t a single Australian wealthy enough to make the all-time rich list. For example, Rubinstein points out that in the 1940s and 1950s, there were probably only a handful of people worth more than £1 million, and no-one worth more than £8 million (the cutoff necessary to make the all-time rich list in 1955).

The closed economy of the 1950s and 1960s imposed costs on society as a whole, but nonetheless this was an era marked by full employment (for men), rapid increases in ownership of cars and houses, and significant reductions in poverty. Yet Rubinstein writes that ‘so markedly different were trends among the very rich compared with those for society as a whole that the post-war period seemed to constitute, as it were, an age of affluence for everyone except the very affluent’.[8] Corporate Australia was shifting from a period of asset-owning proprietors to professional managers, but managerial salaries remained modest.

The social norms of this era were different. Rubinstein says: ‘most of the wealthy now eschewed conspicuous consumption and ostentatious display of riches and privilege as politically unwise and economically costly’.[9] Craig McGregor, writing in the 1960s, said that the wealthy ‘feel under some pressure to be accepted by ordinary working Australians rather than the other way round’.[10]

The fall in inequality in the post-war years isn’t unique to Australia. Atkinson and I have also used taxation data to look at New Zealand, where we see almost precisely the same pattern.[11] Others have looked at the English-speaking nations of Britain and the United States, and the (mostly) English-speaking nation of Canada.[12] Across the Anglosphere, the pattern is very similar: inequality fell steadily from the 1920s until the 1970s. Among the factors that made all these countries more equal were rising education, high top tax rates, fairly closed economies, and strong unions.

Then, starting around 1980, Australian inequality began to rise. Let’s start with the top 1 percent: individuals with a pre-tax income these days of over $200,000. Over the past three decades, Atkinson and I find that the income share of the richest 1 percent has doubled. For the top 0.1 percent – which now means individuals with a pre-tax income of $700,000 or more – their income share has tripled since 1980. The ratio of CEO pay to the pay of an average worker has quadrupled. Relative to average workers, other elite salaries rose too, including the pay of High Court judges, senior public servants, and federal politicians.

These patterns are common across the English-speaking world, though Australia started from a lower base. From 1980 to the late-2000s, the top 1 percent share rose from about 5 to 10 percent in Australia, but from 10 to 20 percent in the US. So on this measure, Australia is twice as unequal as it was in 1980 – but the US is twice as unequal again.[13]

So after being largely absent from Australian life for four decades, we saw the return of the magnate. The 1980s saw the rise of people like Rupert Murdoch, Kerry Packer and Alan Bond. In the 1990s: Frank Lowy, Richard Pratt, Harry Triguboff. And in the 2000s, individuals such as Andrew Forrest, Clive Palmer, Ivan Glasenberg, Gina Rinehart and others. In the most recent year, the cut-off to enter the Australian rich list jumped from $180 million to $215 million.[14] Ten people on the latest BRW Rich List would qualify for the all-time Australian rich list.[15]

Since 1980, Australia has seen 13 percent of household income gains go to the top 1 percent.[16] The rise in top income inequality is reflected in sales of luxury goods. Prices for waterfront properties and great Australian artworks have soared over recent decades, reflecting their scarcity.[17] Over the past two decades, a bottle of 1971 Grange – one of the great vintages – has increased in price at three times the rate of average earnings. The noughties saw a 70 percent increase in annual Porche sales, and a five-fold increase in Maserati sales.[18]

Even cocaine – what Robin Williams once described as ‘God’s way of telling you, you are making too much money’– is being consumed in greater quantities.[19] The number of registered helicopters has doubled.[20] Worldwide, builders of private jets are struggling to keep up with demand.[21] High net worth individuals have also donated more to political parties than ever before, with Graeme Wood giving $1.6 million to the Greens in 2010, and Clive Palmer donating $1 million to the Coalition in 2009-10.[22]

Three big factors drove this rise in top incomes inequality over the past generation. First, the returns increased markedly for those at the top of their field: what economists call ‘superstars’. The IT revolution made it possible for superstar professionals to reach more clients. The biggest companies grew, so top CEOs were servicing a larger organisation. English-speaking labour markets merged, so a large Australian firm looking for a CEO will now conduct a worldwide search, where in the 1970s they would have looked for the best Australian for the job.

Second, union membership has collapsed, from half the workforce in the early-1980s to one-fifth of the workforce today. Empirically, there’s a strong relationship between the unionisation rate in an industry and the amount of wage equality. Unions tend to work harder to get pay rises for their lowest paid members, or to campaign for a common dollar increase (eg. $10 a week), which reduces inequality.

And third, top tax rates were cut.[23] In 1970, Australia’s top personal income tax rate was 69 percent. By 1980, it was 60 percent. By 1990, it was 47 percent. Lower taxes increase top wage earnings by providing an incentive to take on additional work, and they increase capital earnings by allowing investors to reinvest a greater share. There were good reasons for cutting top tax rates, and I’m not arguing for them to rise again today. Yet a surge in inequality was a clear by-product of this decision.

Who Cares?

But should we care about inequality? Or do we take the view that then Workplace Relations Minister Tony Abbott put in 2003: ‘in the end we have to be a productive and competitive society and greater inequality might be inevitable.’?[24]

One set of arguments suggests that we should care about inequality for what are called ‘instrumental reasons’. Inequality, some contend, is associated with worse outcomes in areas that society cares about, such as health, crime, savings and growth. This argument is put most strongly in The Spirit Level, by Richard Wilkinson and Kate Pickett. It is an argument that I used to believe. Indeed, I deeply want to be true, but my own research persuades me otherwise.[25] The closer you get to these asserted effects, the more fragile are the findings. If there are negative effects of inequality on those social outcomes, they must be extremely small. (There are also small positive effects. For example, my own work shows that inequality boosts growth, though the trickle-down process is slow.)

I now believe that a better reason to care about the distribution of income is because humans have a palpable discomfort with high levels of inequality. As a father of two boys, I can attest that my sons are constantly benchmarking one against another. In preparing for this talk, I asked my older son whether he’d prefer that he and his brother both got one biscuit, or he got two and his brother got three. He chose one apiece.

This isn’t confined to children. In a famous economics experiment called the ‘ultimatum game’, the first player decides how she would like $100 divided between her and the other person. The second player chooses whether to accept that division, or give all the money back. If all we cared about was being better off, then the second player should accept the division when he gets anything at all. So if the first player proposes to keep $99 and hand over $1, a second player who doesn’t care about inequality should accept. Yet in thousands of settings, it has been shown that people have a cut-off around $25, below which they’d rather get nothing than receive a share that they regard as miserly. It offends our dignity – our sense of justice.

This sense of egalitarianism reflects what Lester Thurow termed ‘the income distribution as a public good’.[26] Anyone who thinks that economics is about maximising money rather than maximising wellbeing hasn’t gotten past first year. In maximising wellbeing, inequality matters – because a dollar brings more happiness to a poor person than to a rich person.

There are also practical ways in which an increase in top incomes can reduce wellbeing for others. If people are competing for ‘positional goods’, such as a home in a desirable suburb, a place in a top university, or a sought-after job, then inequality may lead to an ‘expenditure cascade’, as those in the middle have to spend more to stay in the race.[27] When top incomes are modest, a young man can happily wear a $200 suit to a job interview. But if top incomes rise, he may feel a need to buy a $1000 suit to compete.[28]

Another reason to care about inequality is that unequal societies tend to be immobile societies. Australia has always prided ourselves as being a place where – as Craig McGregor once put it – ‘The lack of widespread extremes in social differentiation makes it easy for class-jumpers to “pass”’.[29] And yet when I studied the relationship between the earnings of fathers and sons, I found that the degree of intergenerational mobility in Australia wasn’t much different from Britain.[30] True, it is easier to move from rags to riches (or the reverse) in Australia than it is in the United States. But Australia is less socially mobile than many Scandinavian nations, where being born on the ‘wrong side of the tracks’ is barely a barrier at all.

A belief in social mobility sits deep in the heart of the Australian national identity. When we talk about what a good society should achieve, it’s one of the things that first comes to the lips of politicians of all stripes. And yet we know that the more unequal a society, the less mobile it is.[31] If high inequality entrenches poverty and plutocracy across generations, it will damage something that many of us hold sacred.[32] The BRW Rich List is likely to increasingly become populated by those with inherited wealth rather than the self-made.[33]

My final concern about high inequality is that it has the potential to corrode the polity. Campaign contributions in themselves are not a cause for concern, but we must worry when donations buy policy outcomes that personally benefit the donor. At its worst, big donors pay for advertisements that aim to persuade voters that an extreme policy is a moderate one. We’ve seen some of this in the United States over recent years. As the Republicans have moved noticeably to the right, deep-pocket donors such as the Koch Brothers, Harold Simmons, and Sheldon Adelson now spend millions of dollars apiece on advertisements showing Republican candidates wearing jeans and talking to ordinary voters, while arguing that it is the Democrats who are out of touch with working America.

What to do about it?

So, what should we do about rising inequality in Australia?

In preparing for my talk, I went back and read the talks given in 1999, when The Sydney Institute hosted a debate on inequality between Craig Emerson and Julie Bishop. Both argued that education was key to reducing inequality. Emerson focused particularly on fairer private school funding and targeted early education for early childhood programs.

Education is still the most promising way of reducing inequality. Harvard economists Claudia Goldin and Larry Katz argue that we can think about inequality as a ‘race’ between education and technology.[34] When education outpaces technology, we get the ‘great compression’ of the postwar decades. When technology outpaces education, we get the ‘new Gilded Age’ of the recent era. Improving the quality of Australia’s education system, and (yes Craig), early childhood intervention programs for the most disadvantaged is a vital way to reduce inequality.

Targeted welfare is also important. It often goes unnoticed today, but one of the great achievements of the Hawke and Keating Governments was to target income support where it is most needed. Applying means tests and assets tests to the pension in the 1980s was politically tough, but absolutely essential to the sustainability of the system. Our Labor government has taken politically difficult decisions to impose means-tests on the Baby Bonus, Family Tax Benefit Part B, and the Private Health Insurance rebate. None of these decisions had bipartisan support, but they were important in ensuring that the tax and transfer system doesn’t perpetuate inequality.

We also need to recognise that – as Ken Henry pointed out in the 2011 Tax Forum – progressive income taxes are the best tool for redistributing income. The debate about progressivity frequently arises when talking about corporate income taxes, tobacco taxes, the GST, or carbon pricing. The points are valid ones, but the right way to deal with equity issues is through the system that’s best set up to address the problem: the tax and transfer system.

Conclusion

Egalitarianism sits deep in the Australian character.[35] We tend to think that Jack is as good as his master, if not better. Most of us don’t like tipping. If the plumber drops around, we’ll offer him a cuppa. It’s normal to sit in the front seat of a taxi. I’ll say ‘g’day mate’ to a bus driver as I would to a cabinet minister. We don’t typically say ‘sir’ in Australia. In fact, I enjoy the irony that the only knight I know is my inequality co-author Sir Tony Atkinson.

In his study of Japanese prisoners of war, Gavan Daws writes:[36]

‘I began imagining that if human beings were worked and starved and beaten to the point of death, they would be reduced to barely functioning skeletons, scraps of biology, with… all national culture and character tramped out of them. Not so. … all the way down to starvation rations, 1000 calories a day and less, to 100 pound of bodyweight and less .. the prisoners of the Japanese remained inextinguishably American, Australian, British, Dutch.

‘The Americans were the great individualists of the camps, the capitalists, the cowboys, the gangsters. The British hung on to their class structure like bulldogs, for grim death. The Australians kept trying to construct little male-bonded welfare states. [Unlike Americans] Australians could not imagine doing men to death by charging interest on something as basic to life as rice. That was blood-sucking; it was murder. Within little tribes of Australian enlisted men, rice went back and forth all the time, but this was not trading in commodities futures, it was sharing, it was Australian tribalism.’

My grandfather turns 90 years old this year. For most of his life, Australia became a more egalitarian place. It has only been in the last few decades that we have seen again a rise in inequality, now creeping up back towards what it was in the Great Gatsby era into which he was born. The risk is that too much inequality will destroy Australia’s egalitarian spirit.

There are many things about the 1950s and 1960s that we would not want to keep – but one value worth trying to reclaim about that era was the sense of egalitarianism. Too much inequality strains the social fabric, threatening to cleave us one from another. Australia is a stronger nation when we act together than when we pull apart.


* I am grateful to Gerard Henderson for inviting me to give this talk, to Jack Brady for valuable research assistance, and to Fred Argy, Macgregor Duncan, John Edwards, Saul Eslake, John Hirst, Rick Kalowski and John Quiggin for insightful comments on an earlier draft. Although global inequality is higher than national inequality, my focus in this talk is on within-country inequality, since the nation is the strongest point of reference for most Australians.

[1] Median ($427,168)  and 90th percentile ($1,474,854) estimates from ABS, 2011, Household Wealth and Wealth Distribution 2009-10, ABS, Canberra; 99th percentile estimate (about $5 million) from Roger Wilkins, quoted in Mike Seccombe, ‘Australia’s One Per Cent Rising with a Bullet’, Global Mail, 6 February 2012; Rinehart’s wealth ($18 billion) from Forbes Magazine’s March 2012 estimate (http://www.forbes.com/profile/georgina-rinehart/). For the ladder analogy, I am indebted to my thesis adviser David Ellwood, who used it in a recent discussion about inequality at the Harvard Kennedy School.

[2] The Fitzgerald quote appeared in his 1925 short story ‘Rich Boy’. Hemingway’s mocking rejoinder was in his 1936 short story ‘The Snows of Kilimanjaro’. Accounts of the exchange taking place in person are apocryphal.

[3] Both Lucas and Feldstein are quoted in Branko Milanovic, 2007, ‘Why We All Care About Inequality (But Some of Us Are Loathe to Admit It)’, Challenge, 50(6): 109-120.

[4] Wayne Swan, ‘The 0.01 Per Cent: The Rising Influence of Vested Interests in Australia’, The Monthly, March 2012

[5] For an analysis of trends in inequality across the full distribution of incomes, see OECD, 2011, Divided We Stand: Why Inequality Keeps Rising, OECD, Paris; OECD, 2008, Growing Unequal? Income Distribution and Poverty in OECD Countries, OECD: Paris; Frank Stilwell and Kirrily Jordan, 2007, Who Gets What? Analysing Economic Inequality in Australia, Cambridge University Press, Melbourne; Fred Argy, 2006, ‘Equality of Opportunity in Australia: Myth and Reality’, Discussion Paper 85, The Australia Institute, Canberra; Peter Saunders, 2005, The Poverty Wars, UNSW Press, Sydney; Andrew Leigh, 2005, ‘Deriving Long-Run Inequality Series from Tax Data’, Economic Record, 81: S58–S70; Michael Schneider, 2004, The Distribution of Wealth, Edward Elgar, Ann Arbor, MI; Fred Argy, 2003, Where To From Here?: Australian Egalitarianism Under Threat, Allen and Unwin, Sydney.

[6] John Hirst points out that in the nineteenth century, gentlemen dressed in frock-coats and top-hats, policemen were instructed to salute them, and letters to them were always addressed ‘Esquire’. See John Hirst, 2009, Sense and Nonsense in Australian History, pp.145-173.

[7] This paragraph draws on William Rubinstein, 2004, The All-Time Australian Rich List, Allen and Unwin, Sydney.

[8] William Rubinstein, 2004, The All-Time Australian Rich List, Allen and Unwin, Sydney, p.139.

[9] William Rubinstein, 2004, The All-Time Australian Rich List, Allen and Unwin, Sydney, p.143.

[10] Quoted in John Hirst, 2009, Sense and Nonsense in Australian History, p.172.

[11] Anthony B. Atkinson and Andrew Leigh, 2007, ‘Top Incomes in New Zealand 1921-2005: Understanding the Effects of Marginal Tax Rates, Migration Threat and the Macroeconomy’. Review of Income and Wealth, 54(2): 149-165.

[12] Anthony B. Atkinson, 2007, ‘The Distribution of Top Incomes in the United Kingdom 1908-2000’ in Anthony B. Atkinson and Thomas Piketty (editors) Top Incomes over the Twentieth Century. A Contrast Between Continental European and English-Speaking Countries, Oxford University Press, chapter 4; Thomas Piketty and Emmanuel Saez, 2007, ‘Income and Wage Inequality in the United States 1913-2002’ in Anthony B. Atkinson and Thomas Piketty (editors) Top Incomes over the Twentieth Century. A Contrast Between Continental European and English-Speaking Countries, Oxford University Press, chapter 5; Emmanuel Saez and Michael Veall, 2007, ‘The Evolution of High Incomes in Canada 1920-2000’ in Anthony B. Atkinson and Thomas Piketty (editors) Top Incomes over the Twentieth Century. A Contrast Between Continental European and English-Speaking Countries, Oxford University Press, chapter 6.

[13] For example, the threshold to enter the US top 1 percent is US$350,000 (nearly twice what it is in Australia), while the threshold to enter the top 0.1 percent is US$1.5 million (more than twice what it is in Australia). These figures are for 2010, from ‘Table0’ of a spreadsheet provided on Emmanuel Saez’s website, http://elsa.berkeley.edu/~saez/ (spreadsheets last updated 2 March 2012).

[14] The cut off for the BRW rich list went up from $180 million in 2010 to $215 million in 2011.

[15] In the 2011 BRW Rich List, the following people’s wealth exceeded Rubinstein’s cutoff of 0.17 percent of GDP ($2.7 billion): Gina Rinehart, Ivan Glasenberg, Andrew Forrest, Anthony Pratt, Clive Palmer, Frank Lowy, Harry Triguboff, James Packer, John Gandel and Chris Wallin. (I am ignoring the fact that because Rubinstein’s list covered the richest 200, new entrants would slightly raise the cutoff.)

[16] These trends are slightly less extreme than in the US. For example, since 1993, Australia has seen 12 percent of the real household income gains go to the top 1 percent, while the US has seen 52 of household income gains go to the top 1 percent. Australian calculations are my own, covering 1992-93 to 2008-09. US calculations are for 1993-2010, from Table1 of a spreadsheet provided on Emmanuel Saez’s website, http://elsa.berkeley.edu/~saez/ (spreadsheets last updated 2 March 2012).

[17] For example, the price of a 1971 Penfolds Grange has increased sixfold over the past two decades (from around $150 in 1991-93 to around $900 today). By comparison, nominal average full-time earnings are slightly more than twice as large (from around $590 in 1991-93 to $1300 in 2011). See Byron, R.P. and O. Ashenfelter (1995), ‘Predicting the Quality of an Unborn Grange’, Economic Record 71: 400-14; Wickman’s Penfold Grange prices (as at April 2012), http://www.wickman.net/wineauction/Grange_prices.aspx; Reserve Bank of Australia Historical Statistics, Table G6  Labour Costs.

[18] Angus Grigg, 2010, ‘How Did We Get So Rich?’, Australian Financial Review, 23-28 December 2010, pp.32-33.

[19] Angus Grigg, 2010, ‘How Did We Get So Rich?’, Australian Financial Review, 23-28 December 2010, pp.32-33.

[20] There were 943 helicopters registered in 2000, and 1800 in 2010. See Department of Infrastructure and Transport, Bureau of Infrastructure, Transport and Regional Economics, 2012, General Aviation Activity 2010, BITRE, Canberra (and its predecessor publications).

[21] ‘Corporate Jets: Winging It’, The Economist, 14 April 2012.

[22] In recent years, Mr Palmer has donated around $4 million to the Coalition parties, making him the largest single donor to a political party since records began 28 years ago. For thoughtful discussions of this issue by my parliamentary colleagues, see also Wayne Swan, ‘The 0.01 Per Cent: The Rising Influence of Vested Interests in Australia’, The Monthly, March 2012; Malcolm Turnbull, ‘Not classy, Wayne’, Australian Financial Review, 16 March 2012.

[23] Related to the marginal rate changes were shifts in taxation of different types of income, though these were not uniform. For example, a capital gains tax was introduced in 1985, but in 1999 the rate was halved for assets held for a year or more.

[24] Tony Abbott, cited in Mike Steketee (2003) “Still Work in Progress”, The Australian, 7 June, p. 22.

[25] See for example Dan Andrews, Christopher Jencks and Andrew Leigh, 2011, ‘Do Rising Top Incomes Lift All Boats?’ B.E. Journal of Economic Analysis & Policy (Contributions), 11(1): Article 6; Andrew Leigh, Christopher Jencks and Tim Smeeding, 2009, ‘Health and Inequality’ in W. Salverda, B. Nolan, and T. Smeeding (eds) The Oxford Handbook of Economic Inequality, Oxford, Oxford University Press, 384-405; Andrew Leigh and Alberto Posso, 2009, ‘Top Incomes and National Savings’ Review of Income and Wealth, 55(1): 57-74; Christopher Jencks and Andrew Leigh, 2007, ‘Inequality and Mortality: Long-Run Evidence from a Panel of Countries’, Journal of Health Economics, 26(1): 1-24.

[26] Lester C. Thurow, 1971, ‘The Income Distribution as a Pure Public Good’, Quarterly Journal of Economics, 85(2): 327-336.  Calling it ‘envy’ doesn’t make the negative externality any less real: see Branko Milanovic, 2007, ‘Why We All Care About Inequality (But Some of Us Are Loathe to Admit It)’, Challenge, 50(6): 109-120.

[27] See Robert Frank (2007). Falling Behind: How Rising Inequality Harms the Middle Class. Berkeley: University of California Press.

[28] As Tawney noted: ‘what thoughtful rich people call the problem of poverty, thoughtful poor people call with equal justice a problem of riches’: Tawney, R. (1913). ‘Poverty as an Industrial Problem’, inaugural lecture, reproduced in Memoranda on the Problems of Poverty, London: William Morris Press.

[29] Cited in Andrew Leigh (2007) “Intergenerational Mobility in Australia,” The B.E. Journal of Economic Analysis & Policy: Vol. 7: Iss. 2 (Contributions), Article 6. Available at: http://www.bepress.com/bejeap/vol7/iss2/art6

[30] Andrew Leigh (2007) “Intergenerational Mobility in Australia,” The B.E. Journal of Economic Analysis & Policy: Vol. 7: Iss. 2 (Contributions), Article 6. Available at: http://www.bepress.com/bejeap/vol7/iss2/art6. Other intergenerational patterns emerge too. For example, a man who reports that his father was unemployed for 6 months or more when the son was growing up is 3-4 times as likely to himself be unemployed.

[31] See for example Dan Andrews and Andrew Leigh, 2009, ‘More inequality, less social mobility’, Applied Economics Letters, 16, 1489–1492.

[32] My own study compared social mobility across multiple cohorts, and found that father-son mobility was no different for sons born in 1911-1940 than for sons born in 1949-1979. Because the latter cohort mostly grew up after the recent rise in inequality, it is unlikely that I would have been able to detect the impact of the post-1980 rise in inequality on Australian social mobility. See Andrew Leigh (2007) “Intergenerational Mobility in Australia,” The B.E. Journal of Economic Analysis & Policy: Vol. 7: Iss. 2 (Contributions), Article 6. Available at: http://www.bepress.com/bejeap/vol7/iss2/art6

[33] For a thoughtful analysis of this issue, see John Quiggin, ‘The coming boom in inherited wealth’, Crooked Timber blog, 16 April 2012. Available at http://crookedtimber.org/2012/04/16/the-coming-boom-in-inherited-wealth/

[34] Claudia Goldin and Lawrence Katz, 2009, The Race Between Education and Technology, Harvard University Press, Cambridge MA.

[35] Some of these examples draw upon Craig McGregor, cited in John Hirst, 2010, The Australians, 2nd edition, Black Inc, Melbourne, pp.165-166.

[36] Gavan Daws, cited in John Hirst, 2010, The Australians, 2nd edition, Black Inc, Melbourne, pp.144-145.

10 Comments

  1. John Passant says:

    Thanks Andrew. This has some very useful information. The OECD’s Divided We Stand is useful too. I am working on an article at the moment arguing that inequality increases as class struggle declines. Your union membership falling discussion is a proxy for that I think. It seems to me the major contributor to the decline of class struggle in Australia has been the Accord and the 30 years of disastrous flow ons from that. To me Labor in power is contributing to inequality. Growing inequality too seems to match falling profit rates in the developed world since the early 70s as one of various ways the 1%, ruling elite, try to address the tendency of the rate of profit to fall.

  2. paddybts says:

    Dear Andrew, I know it’s a shameful thing, for a fellow to speak love out loud….. to an “economist”.( Even if it’s in a manly decent sort of way) But because you’re an MHR on the Labor side of the great divide, I’ll make an exception. :)
    Fact based articles are an endangered species! Your’s deserves a wider audience. Well done sir!

  3. james walker says:

    “In preparing for this talk, I asked my older son whether he’d prefer that he and his brother both got one biscuit, or he got two and his brother got three. He chose one apiece.”

    Thanks for having the honesty to admit to this. It’s understandable in a child, but disturbing how many adults would rather have equal poverty rather than unequal riches.

    Milton’s Lucifer at least chose to reign in Hell rather than serve in Heaven – it’s sad when people chose to create a Hell on earth, and don’t even have the excuse of ruling it.

  4. Raja Junankar says:

    Andrew, A very interesting talk but not likely to persuade anyone at the Sydney Institute! Yes, Income inequality is high and increasing in recent decades and we should do something to tackle this issue. For example, we should increase the unemployment benefits paid to the same level as the age or disability pensioners.
    However, what is more important than income inequality is Wealth Inequality. Unfortunately, Austrlia is one country that does not have a wealth tax. When is the ALP going to introduce such a tax? Can we introduce a death duties tax?
    I hope that Andrew and like minded people in the ALP would try to tackle the issue of wealth inequality. Good luck!
    Raja

  5. Peter says:

    It is a mistake to claim that between 1950 to 1980 there were far
    fewer super wealthy people. During that era of very high income taxes
    in most countries, the wealthy kept their assets offshore. This was
    probably the time of major growth of offshore tax havens. Thus the
    official wealth as reported by the tax office is misleading.

  6. Sleetmute says:

    While Andrew says that the tax and transfer system is the appropriate vehicle for reducing inequality, at the same time he does not advocate higher marginal tax rates. So where does this leave him? As it is, families on average incomes pay next to no net tax. Our system is already hugely progressive and that is before you include Medicare, the age pension and free public schooling.

    Interestingly for an (ex)economist, there is barely a word about incentives in the entire speech. A more progressive tax-and-transfer system may be relatively cheap to fund, but creates very high effective marginal tax rates that deter hard work and risk-taking. The supposed grief caused by so-called ‘status anxiety’ is not a sound justification for governments to confiscate hard-earned income from some people and hand it to others. People’s anxieties about such things are their own issue.

  7. Peter T. says:

    Raja,
    Yours are fine proposals. But even less likely to persuade the Sydney Institute, let alone the broader electorate! There are egalitaian proposals that raise efficiency and conservatives should support. Looser professional licencing is an obvious one. Looser residential zoning would lower land prices and reduce the disparity in wealth between home-owners and renters. As would increased tax on land rent. Andrew calls for more education. For political and efficiency reasons, this should be coupled with user-pays. Given that education (particularly tertiary) is supply-constrained, not demand-constrained, more user-pays would raise the quantity.

  8. No Thanks says:

    Very good – infact well done. Shame you missed bits about groups who seek laws only to profit them selves with prymids of management (its not an exclusive to liberals – Labor – Unions – Greens; But more over all sides).

    In my state there isn’t any land that people on low incomes could ever afford; yet we have a 1st home buyers scheme as advertised thats open to all Australians; Never mind the fact that Unions and perhaps corperate forces like banks have regulated the final result of what is now condiered a home (basicly giving free 300k kicks on credit to what is known as the social butterfly club for their breeding scheme without any regulation what so ever). Now as far as I know there isn’t a bank on earth that will give 300k upto 500k (average price) to a person whos life has been destroyed by drunks, and other mishaps including frauds like the 1st Home Buyers scheme thats ‘reserved’ for those who are generally first to put the boot in, many are first to winge about interest rates.

    There are things like Long Service leave that rips off construction workers to fund administration workers (infact people are not paid out becuase they are injured or worked in more than 1 state – its a scam and you know it, kind of like super that funds insolvent sydney tunnels).

    Given just the two things above – I REFUSE TO WORK WHILE IN PAIN FOR A GROUP OF THUGS CALLED AUSTRALIANS, BESIDES WHAT THE POINT GIVEN I NOW LIVE IN PAIN, CHILDLESS, AND WITH A MASSIVE TAX BILL FOR THINGS I NEVER DONE!

    To put it more bluntly – I WANT THE LEGAL AND LAWFULL RIGHT TO KILL MYSELF WITHOUT BEING CALLED A NUT, OR HAVING MY LAST WISH DENYED! Yep – I will not put up with drunks having 3 brain damaged kids to get a home while I was forced to save up only to be beaten up by drunks who were supported and funded by the Australian Government and my States own local Government. Yep I must be stupid for attempting to save up and do life the right way – how about you get unions to print up some more fake recycling for school kids, teach even stupid ones like me to lie – cheet and bash the living stuffing from people while drunk gives you special rights – DUI for attempted murder with a weapon is a JOKE!

    Perhaps next time you could include how much your party was paid by Big Grog or the shops that sell it?

    There, now you do need more skilled workers from the USA with failing organs, Im sure there will be brain dead victims of drunks ready for a quick harvest soon – more HSU members also!

    Again, thankyou for having the guts to put your thought up – I’ll have wonder if mine get moderated/deleted. :-)

  9. Grant N Platt says:

    Thanks for tackling the issue Andrew Leigh.

    I support the broad contentions which you have expounded upon.

    In The spirit Level: Why Equality is Better For Everyone, Wilkinson & Pickett give the overwhelming evidence that it is the inequality within a nation which does the harm. In unequal nations (USA, Australia etc) and states, those with less equality have higher rates of incarceration, poor education outcomes, worse health outcomes, shorter longevity, worse employments prospects, and less opportunity. It doesn’t only disadvantage the poor for in unequal states all suffer the consequences. The USA with great wealth has poor health outcomes despite their high cost health system. All suffer from the factors of inequality, even the wealthy who have to work harder to protect themselves from crime generated by their biased system. Conversely, Japan and other more equal nations have less of these problems. Privilege is no indicator of higher intelligence but rather a reflection on the maintenance of inequality through wealth and artificial position. Class and wealth of the ruling oligarchy creates a false impression on the poor and disadvantaged. This was illustrated when Indian low caste people performed better in a test than high caste when not knowing the caste difference of their competitors but lower when they did. Aristocrats are no better than anyone else.

    I recommend the book to all who want a fair go for all and a better world where we really do care about our fellow human beings.

    Grant N Platt Scientific Glassblower and plebeian.

    • Kimble says:

      Ummmm, Grant, perhaps you didnt read the part where Andrew said,

      “This argument is put most strongly in The Spirit Level, by Richard Wilkinson and Kate Pickett. It is an argument that I used to believe. Indeed, I deeply want to be true, but my own research persuades me otherwise.”

      The Spirit Level is not credible science. I would go as far as saying its dishonest; citing papers in support of their ideas that actually say nothing on the subject or even arriving at different conclusions.